Previously featured Hershey Company (New York Stock Exchange:HSY) said in March 2024 that in its fourth-quarter 2023 earnings report, management achieved stable profits despite multiple headwinds and that it expects performance to improve in the second half of 2024 and into 2025. Numbers.
We reiterated our buy rating at the time as we remained optimistic that the company was well positioned for continued growth, especially as salty snacks have seen double-digit growth driven by aggressive M&A activity over the past few years.
Since then, HSY has continued to trade flat at +0.7%, roughly in line with the broader market’s +2.5%. Still, strong performance in 1Q24 and consistent cost optimization have boosted margins, fueling a profitable growth trend despite rising commodity inflation.
The combination of established support levels and rising resistance levels in the stock price means that we believe the stock price will continue to rise. Providing a compelling investment thesis across capital appreciation and dividend income.
HSY’s investment thesis remains strong thanks to its confectionery division
For now, HSY has reported better-than-expected sales and profits in its first-quarter 2024 financial results. Net sales: $3.25 billion (+22.6% compared to previous quarter/ YoY increase of 8.6%), and adjusted EPS was $3.07, up 51.9% quarter-over-quarter and up 3.7% year-over-year.
Commodity inflation notwithstanding, these figures are certainly impressive.
For example, HSY continues to trend upwards. cocoa Due to price headwinds over the past few years, commodity spot prices are currently at an astounding $9.45K per ton (+20.5% MoM, +219.2% YoY, +305.5% MoM). The average in 2019 was $2.33K).
The same has been observed sugar Price was $0.19 per pound (flat m/m/-20.8% y/y/+58.3% from $0.12 in FY2019).
Despite a 5.9% year-over-year price increase to keep up with commodity inflation, HSY recorded strong North American confectionery volume growth of 4.5% year-over-year in the first quarter of 2024, which speaks to the strength of HSY’s well-branded products and customer base.
It is also important to highlight that this segment represents the largest share of the company’s total sales and profits, at 83% (-0.7pp QoQ/+0.7pp YoY) and 92% (-3.9pp QoQ/+2.3pp YoY), respectively.
It’s clear that HSY’s management has done a good job offsetting the cost of sales headwinds thus far, as the company reported a still-strong overall adjusted gross margin of 44.9% in the latest quarter (+0.7ppts sequentially, -1.7ppts year-over-year, +1.5ppts from 43.4% in Q4 2019).
Similar cost efficiencies are also evident in the expansion of overall operating margin to 32.5% (+5.8 points sequentially, +5.7 points year-over-year, and +14.6 points from 17.9% in Q4 FY2019) despite a 3.2% increase in FTE numbers in FY23 (Q1 FY24 figures not yet released).
Much of the tailwind comes from ongoing multi-year productivity initiatives. Drive agility and automationThe initiative aims to improve the supply chain and optimize manufacturing/technology models, with an expected savings of $300,000 per year from 2026 onwards.
A Promising Future for Cocoa
At the same time, readers may wish to note the following: Cocoa Futures and Sugar Futures In particular, futures contracts from July 2024 to September 2025 have settled at encouraging levels, though still higher than pre-pandemic levels, and HSY is likely to benefit from improved gross margins going forward.
This is really good news.
Increasing risks for HSY’s salty snacks division
Nonetheless, readers should note that HSY continues to face softening demand in the North American salty snacks sector, with volume growth only increasing slightly at +0.2% y/y, partially offset by price growth of +1.7% in 1Q24.
Management reported that SkinnyPop (popcorn) sales declined 11% year over year, offsetting strong year over year growth of 11.9% at Dot’s Homestyle Pretzels.
Combined with enhanced advertising efforts and supply chain issues, it is not surprising to see HSY’s North American Salty Snacks division acting as a drag on earnings with operating margins of 14.1% (+9ppts QoQ/-3.2ppts YoY), offsetting the strong growth seen in the confectionery division.
We have so far Very optimistic When it comes to diversifying into salty snacks, it may be wise to give management more time to integrate new acquisitions into the existing business.
Readers will be taking a look at the convenience food king, PepsiCo (Pep) reports that American consumers are increasingly cutting back on discretionary spending and switching to cheaper products.Store Brands The macroeconomic environment remains uncertain, with near-term headwinds “in the face of rising prices” likely to persist for an extended period.
As a result, HSY investors may want to temper their short-term expectations.
HSY’s discounted valuation seems fair.
HSY’s evaluation
For these reasons, we believe HSY’s discounted valuation, FWD P/E, of 20.59x is attractive compared to 21.01x in our last article, the one-year average of 22.57x, and the pre-pandemic three-year average of 23.03x.
At the same time, HSY is also acquiring Mondelez (MDLLZ) has a FWD P/E valuation of 19.56x, while PepsiCo has a FWD P/E valuation of 21.17x.
Consensus Forecast
This is because HSY is expected to generate steady sales/profit growth at a CAGR of +3.4%/ +3.5% through FY2026, compared to +3.9%/ +8.1% for MDLZ and +4.1%/ +7.5% for PEP, suggesting that HSY’s discounted valuation is indeed reasonable.
This is especially true as HSY’s ability to generate profits from its private label confectionery products is evident in its growing volumes and improved margins, despite headwinds such as those seen in salty snacks.
HSY 5 year stock price
For now, HSY continues to trade sideways since October 2023, however, the established support level of $181 and rising resistance level (last observed at $210 in mid-May 2024) suggest that bullish support is expanding.
Our fair price estimate of $193.50 and long-term target price of $252.50 have remained consistent since our last coverage in March 2024, and we believe there remains a significant opportunity for those looking to add to their holdings.
This is especially true because patient investors will be rewarded for waiting with an expanded forward dividend yield of 2.77%, compared with the four-year average dividend yield of 1.95% and the sector median of 2.79%.
As a result of the excellent dual earnings prospects from capital appreciation and dividend income, we maintain a buy rating on HSY shares.
Based on the established trading pattern, investors might consider waiting for another retracement while adding at the $181 support level for an improved margin of safety.